The US-led coalition in Iraq is on the verge of bowing to Shia Muslim pressure for direct elections before the handover of power on June 30, the Guardian has learned.

According to British officials, the Blair government has been swayed by Shia arguments and the US is also shifting ground.

They believe that Paul Bremer, the US head of the Coalition Provisional Authority (CPA) running Iraq, has been persuaded of the need for direct elections, provided it can be shown that they are practicable.

"Iraq could become a reasonably functioning democracy, or else it will eventually fall apart," said one senior British official. "Democracy loosens things up."

The official added: "Jack [Straw, the foreign secretary] has been telling Colin Powell [the US Secretary of State] that the process is a bit like riding a bike. You've got to keep it moving, even if it wobbles all over the place."

A shift in plans for elections follows a series of abrupt policy changes made by the coalition over the last few months, mainly forced by events on the ground, and will add to the sense of disarray in the CPA.

The CPA has come under sustained pressure in recent days from Ayatollah Ali al-Sistani, the most senior Shia cleric in Iraq. Tens of thousands of his supporters staged protests in Baghdad and across Iraq yesterday and on Monday demanding direct elections this summer.

Until now, the US has said there is insufficient time to organise such elections and they should be delayed until next year. But Mr Straw has been arguing that, though the arguments are finely balanced, the security situation would be significantly better if full elections could be staged, even if there is no formal electoral roll.

British officials insist that the argument has been accepted by Mr Bremer and the state department but they are less certain that the whole Republican administration has accepted the position.

The Foreign Office has been examining options for holding direct elections, such as using ration cards as means of identification - a hangover from Saddam Hussein's regime - or using dyes to stamp voters' hands.

A key factor in the timing of elections in Iraq has been George Bush's determination to have power transferred to Iraqis before the US presidential election in November.

Mr Bremer came up with a seven-step programme leading to the transfer of power next year but this was scrapped and replaced with the present plan, which envisages a transitional Iraqi government being selected by the "great and the good" in 18 regional caucuses, followed by direct elections next year.

But the dominant Shia Muslim community, led by Ayatollah Sistani, stepped up pressure almost two weeks ago for full-scale elections.

The Ayatollah was suspicious of the caucuses, fearing they would prevent the Shia, who make up 65% of Iraq's people, taking their place as the dominant grouping in Iraq.

The coalition forces are keen to keep Ayatollah Sistani on side. Richard Perle, a senior Pentagon adviser and one of the ideological architects of the Iraq war said yesterday: "My understanding is that Ayatollah Sistani's position is there must be elections. The CPA says there must be elections. It's just a question of timing. It's not as deep a gulf as it appears. There may well be formulas for working this out."

Mr Bremer and his British deputy, Sir Jeremy Greenstock, persuaded the UN secretary-general, Kofi Annan, in New York on Monday to send a mission to Iraq to look at the feasibility of direct elections and to discuss their findings with Ayatollah Sistani.

British officials are reluctant to go public with their change of heart, fearing they would be seen as pre-empting the UN mission.

Whitehall accepts that elections run the risk that Iraq would go the way of the Shia quasi-theocracy in Iran, but believes it is at least as likely that Iran, now gripped by internal political battles, will move towards a more plural regime.